Monday, 11 April 2011

Information Failure (Microeconomics)

Information failure is something that can cause market failure. There isn't really much to information failure, the name says it all really, so this post will remain relatively short. Basically, information failure is when consumers do not receive the correct/enough information before making decisions. I could reel off many examples of this, a few being:

  • When consumers aren't aware of the benefits of a good, such as fruit or vegetables, and thus the good is under-consumed.
  • When consumers aren't aware of the drawbacks of a good, such as alcohol, and thus the good is over-consumed.

Causes of this lack of awareness stated above is usually things such as persuasive advertising leading to high consumption levels of 'bad' goods or inaccurate product packaging.

One particular type of information failure is asymmetric information. This occurs when information isnt shared equally between two parties. An example of this is visiting the dentist; the dentist has more medical knowledge as you, so you rely on them to pass the information on to you - which they may or may not do.

In brief, information failure is the lack of accurate information given out which leads to mis-allocation of resources, thus market failure! 

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